An extremist, not a fanatic

September 09, 2011

Celebrating irrationality

In the day job, I say that gold’s rise has enriched some very silly people, and a reader replies that he wishes he had been even sillier. This highlights the fact that being right is no evidence of being rational. The point here is not merely Ecclesiates’ one, that riches don’t go to men of understanding because time and chance happeneth to us all. It’s that irrationality might actually be necessary for success. As a higher authority than the Bible said, “no great thing has ever been accomplished without somebody's crazy belief."The example of gold shows this. The man who, who a few years ago expected hyperinflation and/or full-blown debt crises in the UK and US would have piled into gold and made a packet by now - much more, in fact, that the less idiotic investor who took a more cautious position.This is not the only example. Irrationally overconfident people are more likely to be promoted, because others mistake their overconfidence for real ability. And, indeed, irrational overconfidence is necessary to motivate people to enter risky jobs such as sports, politics, the arts or entrepreneurship. As Richard Nisbett and Lee Ross said in one of the earliest works on cognitive biases:

We probably would have few novelists, actors or scientists if all potential aspirants to these careers took action based on a normatively justifiable probability of success. We might also have few new products, new medical procedures, new political movements or new scientific theories.

All this should be well-known. But here’s my concern. What if this selection for irrationality combines with a form of hindsight bias in which people attribute wisdom to the successful? We will then give too much credence to the idiotic investor who over-weighted gold for barmy reasons, to the boss who won promotion by being irrationally overconfident, to the politician who won power by unreflectingly articulating the prejudices and idiocies of his colleagues and the public, or to the novelist or entrepreneur who just got lucky. The bland or foolish thoughts of the rich and successful will be lauded, whilst the interesting ideas of the more obscure will go unnoticed. We will then celebrate irrationality.I fear this might explain a lot of editorial decisions at the BBC and in the print media.

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Except that a broken clock is right twice a dad!
Gold is a bad long term investment but all Investments can be bad in a future finite period of time. You can make or lose money by any procedure rational and irrational. Some people will be right by mere luck and gain in any area of life. Uncertainty prevents a perfectly rational calculation in most areas of life. So we flip a coin. There is no point lamenting the fact as no one can do anything about it. It is probably good for society that people undertake irrational ventures which is why the propensity exists in the population. Like evolution more generally the individual members of the population may not gain or even die out. But the whole may gain a reproductive advantage. It is the difficulty of understanding the law governed basis of selective pressure that makes evolution a hard idea to discover. Red in tooth and claw and devoid of moral merit. Automatic and world mastering as gravity. You are not good or clever just the working prototype of evolution by natural selection; soon to be replaced by a better prototype.

"The man who, who a few years ago expected hyperinflation and/or full-blown debt crises in the UK and US would have piled into gold and made a packet by now - much more, in fact, that the less idiotic investor who took a more cautious position."

Perhaps he was simply making a rational assessment of other's irrationality - based on past behaviour during economic crises? Which may not be so idiotic.

How anyone could look at the accelerating levels of debt and not see it was a road to disaster (aside from those who stood to gain from the suspension of disbelief) is the real mystery.

Jim - I'm not piqued at missing out at all. I miss tons of opportunities. It's the counterpart of not losing very much in other senses.
It is obvious that anyone who expected hyperinflation/UK debt crisis was not only wrong, but irrational.
@ Charles - there were/are lots of good rational reasons to buy gold, anticipation of others' idiocy being just one. I'm NOT thinking of all gold investors here, merely those who bought for those stupid reasons.

"We will then give too much credence to the idiotic investor who over-weighted gold for barmy reasons, to the boss who won promotion by being irrationally overconfident, to the politician who won power by unreflectingly articulating the prejudices and idiocies of his colleagues and the public, or to the novelist or entrepreneur who just got lucky."

Spot on, can't stand it when reporters think that the people who know most about the jobs markets are chief executives at large companies, rather than labour market economists.

Worshipping the successful to make out that anyone can "make it" and all that as well.

Hyperinflation is a very remote possibility in any Nation and usually only happens in the aftermath of defeat in a large war. To think it could happen in the UK in the near future is irrational and stupid, a myth put about to help sell gold to the gullible and provide spurious arguments for reactionary economic policies. Also there is a reason why Gold and other metals are not used in daily commerce, they are very inconvenient to use. If hyperinflation did happen here and wiped out the value of fiat money a new fiat money would eventually replace our existing currency and you would have to convert your Gold bars or certificates in to the new paper money to buy food and other goods. The owner of Gold silver etc would have no power to control the exchange rate in advance so the future utility of the gold is uncertain. In a crisis severe enough to produce hyperinflation the political situation would be disorderly and so the state might just confiscate your Gold as happens under authoritarian Governments frequently. To suppose social break down bad enough to require abandoning fiat money is to suppose the total unreliability of all economic value. There is no hedge against that open to any private citizen.

@Keith: the owner of a gold coin has held an easily portable, readily acceptable form of wealth for thousands of years. The pound has been around for a few hundred years and currently buys a fraction of what it could even a few decades ago(having lost most of its value since no longer being backed by gold).

Gold may not be the perfect store of value, but it never goes to zero. Whereas the history of fiat currencies is littered with paper money that is worthless today.